Formula
How to Calculate EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization — a proxy for operating cash flow and profitability, especially relevant for growth equity and PE deals.
Earnings Before Interest, Taxes, Depreciation & Amortization
EBITDA = Revenue - COGS - Operating Expenses + D&A
Where
- Revenue
- = Total revenue
- COGS
- = Cost of Goods Sold
- D&A
- = Depreciation and Amortization (added back)
What Is EBITDA?
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a measure of a company's core operational profitability. By stripping out interest, taxes, and non-cash items (depreciation, amortization), EBITDA approximates cash generated from operations before capital structure and accounting decisions. For early-stage VC companies, EBITDA is often negative (they're intentionally burning cash to grow). EBITDA becomes more relevant at growth equity and private equity stages, where investors pay EBITDA multiples to value mature companies. In the Rule of 40 framework for SaaS, EBITDA margin is one of the two inputs alongside revenue growth rate.
Worked Example
Growth equity firm Meridian Partners is evaluating SaaS company CloudFlow, which has $20M in annual revenue. CloudFlow's income statement shows $3M in operating income, but includes $2M in depreciation of servers and $500K in amortization of acquired IP. The company's EBITDA is $5.5M ($3M + $2M + $500K). Meridian uses this EBITDA figure to compare CloudFlow against other SaaS companies, since it removes the noise of non-cash expenses and capital structure differences. When CloudFlow reports quarterly earnings to investors, they highlight 40% EBITDA growth year-over-year, demonstrating improving operational efficiency despite heavy R&D investments that don't appear in the EBITDA calculation.
Why EBITDA Matters
EBITDA becomes critical as startups scale beyond early-stage losses toward profitability. Unlike net income, it strips out financing decisions and accounting methods, giving investors a cleaner view of operational performance. Growth equity investors especially rely on EBITDA to compare companies across different capital structures and geographies. For founders raising growth rounds, demonstrating consistent EBITDA improvement signals operational discipline and scalable unit economics. However, overemphasizing EBITDA can mask real cash flow issues if working capital or capital expenditure needs are high.
Related Terms
Frequently Asked Questions
How do you calculate EBITDA?
EBITDA is calculated using the formula: EBITDA = Revenue - COGS - Operating Expenses + D&A. Earnings Before Interest, Taxes, Depreciation, and Amortization — a proxy for operating cash flow and profitability, especially relevant for growth equity and PE deals.
What is a good EBITDA?
What constitutes a "good" EBITDA depends on context — the fund's stage, vintage year, and strategy. Check our benchmarks and calculators for specific ranges.